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Luna Innovations Incorporated (NASDAQ:LUNA)

Q1 2012 Earnings Call

May 9, 2012 5:00 pm ET

Executives

My E. Chung – President and Chief Executive Officer

Dale E. Messick – Chief Financial Officer

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Luna Innovations Incorporated Earnings Conference Call. My name is Jeff, and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will facilitate a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the conference over to your host for today, Mr. Dale Messick, Chief Financial Officer. And you have the floor, sir.

Dale E. Messick

Thanks, very much Jeff. Good afternoon, everyone and thank you for joining us today for a review of Luna’s results for the first quarter 2011.

Before proceeding with our presentation, let me remind each of you that statements made in this conference call, as well as in our public filings, releases, and websites, which are not historical facts, maybe forward-looking statements that involve risks and uncertainties and are subject to change at any time, including, but not limited to statements about future financial and operating performance.

We caution our investors that any forward-looking statements made by us are management’s beliefs based on currently available information and should not be taken as a guarantee of future results or performance. Actual results may differ materially as a result of a variety of factors as discussed in our earnings release and our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission.

We disclaim any obligation to update any such factors or to announce publicly the result of any revisions to any of the forward-looking statements to reflect future events or developments. There is more complete information regarding forward-looking statements, risks, and uncertainties in the company’s filings with the SEC available on our website.

And at this time, I’d like to turn the call over to My Chung, President and CEO of Luna Innovations.

My E. Chung

Thank you, Dale. Today, I would like to give you an update on our key business developments since our last call as they relate to the growth initiative that we previously laid out.

Following my comments, I will turn the call back over to Dale for a discussion of our operating results for the first quarter. And then I will be happy to take any questions you might have.

Just a quick recap on our three key growth initiatives, first is to become…

Dale E. Messick

Jeff, there is some lead over in our call. It’s not coming from this room.

Operator

Yeah, my apologizes. Please continue.

My E. Chung

First is to become the leading supplier of fiber optic shape sensing and localization systems and components for minimally invasive surgical systems. Number two is to be the leading provider of composite sensing systems. And number three is to be the leading supplier of cybersecurity systems and services.

Yesterday, we announced a new development partnership with Philips Medical to conduct work in advancing Luna’s fiber-optic shape sensing technology towards commercialization and non-robotic medical applications. We have been discussing the collaboration for more than a year with Philips since they acquired a sublicense to our technology for non-robotic medical applications from Hansen Medical in February 2011 for $23 million. Philips purchased several prototype systems from us at the end of 2011 for internal testing, and we are now taking the relationships to the next level with a development agreement encompassing very unique requirements.

As you can imagine, we are very exited to begin working with Philips to further expand our region to the healthcare from robotic minimally invasive surgical systems with Intuitive Surgical and Hansen Medical to now non-robotic medical applications with Philips.

Similar to our agreements with Intuitive Surgical and Hansen Medical, this relationship will have a dedicated Luna team to develop a shape sensing product to meet certain technical specifications necessary for integration into our Philips platform. We believe that this agreement further validates the market potential for our technology.

In March, we completed an amendment to our agreement with Intuitive Surgical extending our original agreement entered in 2007 to cover the development work required to achieve their objective for 2012. We are excited to be continuing this partnership towards the successful implementation and commercialization of our technology into their targeted systems.

The second key growth strategy of ours is to become the leading provider of sensing systems for testing composite materials. Our technology gives manufactures and operators the ability to know what is happening inside composite structures and see damage even if it’s not visible.

We are improving the way composite materials are tested and validated for peak performance and safety, which is significant because of the shift towards composites in several large markets.

Last August, we introduced our ODiSi platform to address this market. And while receiving orders for the product, we continue to develop the technology in response to the markets need. As I mentioned on our last call, our initial rollout of this product identified additional technical specifications required in order to adequately address the composite sensing market.

In January, we put together a high performance development team dedicated and incentivized to developing an enhanced product in record time. I’m happy to say that this team stepped up to the challenge and was able to develop a product that’s 20 times faster in measurement speed and half the price of our previous ODiSi platform.

Furthermore, they were able to complete this in half the time, it normally would have taking us. The significant accomplishment not only demonstrates what our engineering team is capable of, but will also allow us to introduce new products this quarter, which we expect will significantly broaden the adoption of our Distributed Sensing Technology.

Our third growth strategy is to continue to advance our industry leading cybersecurity solutions. Our secure computing group has expanded our design integrity solutions to enable high reliability verification of FPGA designs for the industry standard DO-254. As well as enable engineers to more easily migrate designs from obsolete FPGAs to modern parts.

Only recently have we been able to discuss our capabilities, so as we began to communicate what it is specifically that we can do, we hope to expand our secure computing and communications services revenue. As you can see, we are making significant progress in all three of our key growth strategies and are enthusiastic about our future.

With that, I will now turn the call over to Dale to review the financial highlights.

Dale E. Messick

Thank you, My. For the first quarter of 2012, we expect to report a net loss to common stockholders of approximately $369,000 on total revenues of $8.4 million, an improvement of nearly $700,000 or 65% compared to our net loss attributable to common stock of $1.1 million in the first quarter of 2011.

Revenues decreased 7% from $9 million in the first quarter of 2011 to $8.4 million in the first quarter of this year with the decline being primarily driven by continued weaker demand for fiber optic test and measurement equipment in the telecom market. Overall, product sales decreased by approximately $480,000, while funded product development activities declined by less than $200,000.

Revenues from our technology development segment grew slightly from $5.6 million in 2011 to $5.7 million for the recent quarter. Our gross margin improved to 38% of revenue for the first quarter of 2012, compared to 37% in the first quarter of last year with that improvement coming primarily in the overhead component of the cost of sales in our government contracts. With this improvement, we recognized an increase of 3.6 percentage points in the margin of the technology development segment.

Operating expenses decreased nearly $750,000 from $4.2 million in the first quarter of last year to $3.5 million in our most recent quarter, an improvement of 18% in OpEx. Within OpEx, our SG&A expenses decreased $0.9 million including a $0.4 million reduction in share based compensation expenses.

Additionally, professional fees as well as consulting fees to our founder also declined by approximately $200,000 to $300,000 each. With that reduction in expenses, we realized an improvement in the bottom line to a loss attributable to common of $369,000 in the first quarter to 2012, compared to a loss of $1.66 million in the comparable quarter of last year.

We realized a net cash outflow of $1.1 million during the quarter, largely driven by an increase of $0.9 million in accounts receivable since year end, reflecting the timing of a significant portion of our product revenues for the quarter being realized towards the end of the quarter and therefore not yet collected.

In addition, our cash outflow is due tend to be somewhat higher in the first quarter of the year as we make payments on annual license fees and incur higher expenses for professional fees in connection with filing our annual report and our proxy statement.

Looking forward into Q2, we currently expect our revenues to be in the range of $8.5 million to $9 million with a corresponding net loss in the range of $0.1 million to $0.3 million. We will likely see negative cash flow again in Q2 with scheduled timing of payments, after which we currently anticipate returning to realizing positive cash flow.

For the year, we’re maintaining our previous guidance of revenue in the range of $32.5 million to $37 million, and a net loss for the year in the range of $0.2 million to $1.2 million.

So with that, I’ll turn the call back over to My.

My E. Chung

Thank you, Dale. As I said, I am enthusiastic about the progress we’re making; our new Philips Medical agreement broadens our reach in the healthcare market with potential impact that goes beyond the initial growth strategy that we put forward for shape sensing.

We’ve continued to develop our [RAC] product, directly responding to the needs of capacitive sensing market, and we have advanced our cybersecurity technology positioning us very effectively to serve the markets of secure computing and communications needs.

Along with those advancements on our key initiatives we’re progressing well in other areas throughout the company. As you recall, I have talked about changing the company from a research driven organization into a high performance channels and marketing driven establishment. That progress can be seen throughout from the TDD groups that are focused on larger contract wins and commercialization of their technology to the telecom sales force that is expanding their reach into new territories. The entire organization is excited and energized with the transformation underway.

So at this point, I’d like to open up for any questions that you might have.

Questions-and-Answer Session

Operator

Thank you (Operator Instructions) All right. Ladies and gentlemen, since there are no questions, I will turn the call over to Mr. My Chung for closing remarks.

My E. Chung

Okay, thank you, Jeff. I’d like to thank everyone that joined us today on the call. And again, we are open to any questions or comments that you have. And with that, I’d like to say good evening.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may disconnect at this time. Have a wonderful day.

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